When discussing Japan's economy, many associate it with a strong currency. However, in recent years, this image has shifted dramatically as the yen has continuously weakened, reaching its lowest level in over 40 years.
This decline has raised concerns among global investors, but looking back historically, a weak yen is not new and has often served as a significant catalyst for Japan's economic and stock market growth.
Back in 2013, Prime Minister Shinzo Abe’s government launched "Abenomics" to revive the long-stagnant economy, with a key element being aggressive monetary easing by the Bank of Japan.
This resulted in a rapid depreciation of the yen.
Although many feared the weak currency signaled economic weakness, the opposite occurred: Japanese exporters—including automakers, machinery, and industrial goods manufacturers—became more competitive globally as their products became cheaper in foreign currencies.
At the same time, income earned abroad translated into higher yen amounts, boosting corporate profits and driving a multi-year bull market in Japanese stocks.
However, the weaker yen also has a downside because Japan imports large amounts of energy, food, and raw materials, which raises living costs for its citizens.
Analysts at TISCO Securities note that although the yen has depreciated to around 162.77 yen per U.S. dollar—its lowest in decades—this represents only about a 4% decline since early 2026, which is not unusually volatile for the foreign exchange market.
The main driver is the stronger U.S. dollar, following revised expectations for U.S. monetary policy, which shifted from anticipated rate cuts to potential rate holds or hikes.
This has led capital to flow back into dollar-denominated assets, while Japan faces fiscal pressures from government stimulus spending and social support measures, raising long-term fiscal discipline concerns.
Despite interventions by Japan’s Finance Ministry and Bank of Japan, spending nearly 12 trillion yen to support the currency, these efforts only yielded short-term effects before the yen weakened again under global market pressures, demonstrating that intervention alone cannot override economic fundamentals.
Nonetheless, TISCO views the weak yen as beneficial for Japan’s economy by improving competitiveness of Japanese companies and increasing foreign income when converted back to yen, despite increased import costs and living expenses.
Additionally, the situation is not overly worrisome as Japan’s real wages have started to grow positively, the government continues measures to support living costs, and the U.S. dollar may not strengthen much further, suggesting the yen could trade within a 160–170 range against the dollar in the latter half of 2026.
While many worry about the yen’s weakness, from an investor’s perspective, the Nikkei 225 index has continued to deliver strong returns.
Looking at Nikkei 225 returns:
Meanwhile, the TOPIX index’s returns are:
InnovestX Securities evaluates that the weak yen is not only a challenge but also a tailwind for Japanese listed companies, particularly exporters with high foreign income proportions, as converting earnings back to yen boosts profits. For example, Toyota Motor Corporation has noted that a one-yen depreciation in the yen can increase its annual operating profit by hundreds of billions of yen.
For investors, it is advised to monitor risks from currency interventions, the unwinding of carry trades, and to consider foreign exchange hedging.
This is because returns on Japanese stocks or funds depend not only on stock prices but also on yen exchange rate movements.
Sources: Investing, TISCO, InnovestX.
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